Broadwind, Inc. — Q3 2023 Form 10-Q
Business context and period. Broadwind manufactures precision structures, equipment and components for wind energy and other energy, mining and infrastructure markets. This unaudited filing covers the quarter and nine months ended September 30, 2023. Wind energy represented 51% of revenue in both the first nine months of 2023 and 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $57.2 million | $44.8 million | $156.9 million | $136.7 million |
| Gross profit / margin | $10.2 million / 17.8% | $3.7 million / 8.4% | $25.5 million / 16.2% | $8.2 million / 6.0% |
| Operating income (loss) | $5.4 million | $(0.5) million | $8.9 million | $(4.5) million |
| Net income (loss) | $4.4 million; diluted EPS $0.20 | $(1.8) million; diluted EPS $(0.09) | $6.6 million; diluted EPS $0.31 | $(6.9) million; diluted EPS $(0.34) |
| Adjusted EBITDA (non-GAAP) | $7.6 million | $1.9 million | $17.0 million | $2.3 million |
| Operating cash flow | Not separately presented | Not separately presented | $(22.6) million | $(10.3) million |
| Free cash flow (non-GAAP) | $(1.2) million | $0.2 million | $(13.8) million | $(8.2) million |
- Q3 revenue rose 27.5%; nine-month revenue rose 14.8%. Growth reflected higher sales across segments, including tower shipments and steel content, industrial fabrication, and gas-turbine-related shipments.
- Profitability improved substantially, but Q3 and nine-month results included $4.5 million and $11.2 million, respectively, of Advanced Manufacturing Production (AMP) credits recorded as reductions to cost of sales. These credits were a significant contributor to Heavy Fabrications’ improved results.
- At September 30, cash was $1.7 million, down from $12.7 million at December 31, 2022. Current assets were $99.7 million and current liabilities $84.4 million.
- Total debt was $26.3 million; debt plus finance lease obligations totaled $31.6 million. The company had $18.5 million drawn on its revolving line and $6.4 million on its term loan. It reported $11.9 million of additional borrowing capacity under its credit facility and compliance with financial covenants at quarter-end. The facility’s effective rate was 7.82%.
- Nine-month capital expenditures were $5.3 million, compared with $2.8 million a year earlier. Net cash used in financing was $16.9 million, primarily reflecting increased credit-facility borrowings.
Material changes and operating trends
- Q3 orders fell to $15.9 million from $84.5 million; nine-month orders were $80.9 million versus $163.2 million. Book-to-bill was 0.3 for Q3 and 0.5 for the nine-month period, compared with 1.9 and 1.2, respectively, in 2022.
- Backlog was $220.8 million at September 30, up from $132.2 million a year earlier. Backlog is subject to adjustment for timing changes under a major wind-tower supply agreement.
- Q3 segment revenue and operating results were mixed: Heavy Fabrications revenue was $38.3 million and operating income $5.8 million; Gearing revenue was $11.4 million and operating income $0.3 million; Industrial Solutions revenue was $7.4 million and operating income $0.8 million.
- Gearing orders declined 81% in Q3, with management citing weaker demand from oil and gas, mining and industrial customers; its operating margin declined to 2.3% from 6.1%. Heavy Fabrications orders were lower mainly because a major customer had secured longer-term capacity in late 2022. Industrial Solutions orders declined 20% in Q3, while revenue increased on shipment timing and international sales.
Liquidity, outlook and risks
- Management stated that available cash, credit-facility capacity, expected operating cash generation, equipment financing and potential securities proceeds should meet liquidity needs for at least the next 12 months. This outlook is qualified by the risks below; cash was low and nine-month operating cash flow was materially negative.
- A roughly $175 million wind-tower supply agreement calls for fulfillment from 2023 through 2024. In early November 2023, the parties discussed shifting about half of the tower sections planned for 2024 into 2025 while maintaining the total quantity. The filing says this timing shift could affect the availability of AMP credits for monetization in 2024.
- Management attributed the $22.6 million of nine-month operating cash use primarily to higher receivables following changed payment terms with a major customer. Receivables increased to $41.3 million from $17.0 million at year-end; an $11.2 million AMP credit receivable was also recorded.
- Management warned that weaker production, sales, collections, customer deposits or new orders, or difficulty finalizing remaining supply-agreement terms, could create liquidity pressure. Deteriorating performance could jeopardize covenant compliance and access to the credit facility; additional equity could dilute shareholders and debt financing could impose restrictions.
- The $11.2 million of recognized AMP credits depends on the Inflation Reduction Act; technical guidance and regulations remained pending. Changes in interpretation or law could reduce expected benefits. A full valuation allowance remained against deferred tax assets, and use of net operating losses is subject to ownership-change limitations.
- The company filed a new shelf registration statement, effective October 12, 2023, and had approximately $11.7 million remaining available under its at-the-market sales agreement at September 30. No shares were issued under that agreement during the first nine months of 2023.
- Other cited risks include significant-customer and supplier dependence, market and policy uncertainty in wind energy and other sectors, competition, commodity volatility, and the possibility of litigation or environmental liabilities. Management said routine legal proceedings were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the major customer’s payment-term change reverses and receivables convert to cash as expected.
- Actual monetization and cash receipt of AMP credits, and the effect of forthcoming regulatory guidance.
- Final timing and terms of the wind-tower supply agreement, including the proposed shift of 2024 orders into 2025 and its effect on backlog, revenue and cash flow.
- Order intake and book-to-bill recovery, particularly in Heavy Fabrications and Gearing, and whether reported backlog converts into profitable shipments.
- Liquidity, borrowing availability, interest costs and continued compliance with credit-facility covenants; also consider dilution if securities are issued.
- How much of the improvement in earnings reflects recurring operating performance versus AMP credits, and whether margins remain sustainable.